Powell says Fed insulated from politics, wrestling with rate cuts

THE FED - NEW YORK, June 25 (Reuters) - Federal Reserve Chairman Jerome Powell on Tuesday said the U.S. central bank is "insulated from short-term political pressures," and that its policymakers are wrestling with whether to cut interest rates as President Donald Trump has demanded.

"The Fed is insulated from short-term political pressures -what is often referred to as our 'independence,'" Powell said in a speech he delivered at the Council on Foreign Relations in New York. But Powell said he and his colleagues are "grappling" with whether current risks to the economy warrant a rate cut.

The Fed, which paused its rate-hike campaign this year and suggested last week that it could cut borrowing costs as early as next month amid concerns about U.S. trade disputes and other economic risks, is facing increasing anger from Trump.

The U.S. president, who has said as recently as this weekend that he has the power to demote Powell, said on Twitter on Monday that the Fed "doesn’t know what it is doing," adding that it "raised rates far to fast" and "blew it" given low inflation and slowing global growth.

Trump believes the U.S. dollar is too strong, and the euro too weak, and feels the situation could be eased if the Fed lowered rates, a senior administration official said on Tuesday.

The official also said the White House had no plans to demote Powell, who was nominated by Trump in late 2017 and took over as Fed chief in early 2018. Some legal experts say it would be hard or impossible for Trump to remove Powell.

The U.S. Congress "chose to insulate the Fed" from political pressure "because it had seen the damage that often arises when policy bends to short-term political interests," Powell said in his speech.

U.S. stock indexes dropped following Powell's remarks while yields on U.S. Treasury bonds ticked higher. The dollar edged higher against a basket of currencies.

Investors, who have been anticipating rate cuts this year, still expect the Fed to cut its benchmark overnight lending rate next month, though after Powell's remarks they scaled back aggressive bets it would be reduced by half a percentage point next month.

Separately, St. Louis Fed President James Bullard told Bloomberg Television he does not think a cut of half a percentage point is warranted when the policy-setting Federal Open Market Committee meets again in July, even though he pushed to lower rates last week.

Powell on Tuesday reiterated that the central bank still sees U.S. growth prospects as strong, with unemployment low and inflation near the Fed's 2% annual target, but that he and his colleagues are wrestling with whether uncertainty over trade and inflation support a case for lowering rates.

"The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation," Powell said.

"Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment," he said.

Powell said doing so would risk adding even more uncertainty to the outlook and that the FOMC "will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion."

(Reporting by Trevor Hunnicutt; additional reporting by Jeff Mason in Washington and Richard Leong in New York; editing by Paul Simao and Phil Berlowitz)